Leading U.S. carrier Southwest Airlines Co. (LUV) reported impressive third-quarter 2014 results. The company reported earnings of 55 cents per share surpassing the Zacks Consensus Estimate of 52 cents. The results were also considerably higher than the prior-year quarter earnings of 34 cents. This marks the carrier’s fifth consecutive quarter of record profits, achieved on the back of successful execution of its strategic initiatives.
Quarterly revenues moved up 5.6% year over year to $4,800 million, ahead of the Zacks Consensus Estimate of $4,768 million. On a year-over-year basis, Passenger and Freight revenues increased 6% and 9.8% respectively, while Other revenues fell 3.5%.
Operating Statistics
Airline traffic, measured in billions of revenue passenger miles, moved up 5.6% year over year to 28.52 billion in the third quarter. Capacity or available seat miles decreased 1.1% to 33.79 billion, while load factor (percentage of seats filled with passengers) leaped 360 basis points year over year to 84.4%. Passenger revenue per available seat mile (PRASM) increased 4.9% year over year to 13.51 cents.
Operating Expenses & Operating Income
For the third quarter, adjusted operating income scaled up to $649 million from $439.0 million a year ago, resulting in an operating margin of 13.5%.
Total adjusted operating expenses increased 2.6% year over year to $2,677 million. Fuel price (economic) accounted for $2.94 per gallon, down from $3.06 in the year-ago quarter. Consolidated unit cost or cost per available seat mile (CASM) excluding fuel and special items, increased 2.6% year over year to 8.22 cents.
Liquidity
At the end of the third quarter, Southwest Airlines had $3.6 billion in cash and short-term investments and $1 billion in undrawn revolving credit facilities. The company had long-term debt (including current portion) of $2,125 million.
Exiting the third quarter of 2014, Southwest Airlines generated operating cash flow of $2.7 billion while capital expenditures amounted to $1.3 billion. During the third quarter, the company repurchased 5 million shares for approximately $200 million and paid dividends worth $41 million. As of Sep 30, 2014, return on invested capital (before taxes and excluding special items) through the past one-year period is 19%.
Guidance
Southwest Airlines expects an increase in the fourth quarter and 2014 unit costs, excluding fuel, profit sharing and special items. Fuel price (economic) is estimated to range from $2.70 to $2.75 per gallon.
Upcoming Release
Spirit Airlines Inc. (SAVE) is scheduled to release its third-quarter 2014financial results on Oct 28.
Our Take
Southwest Airlines currently sports a Zacks Rank #2, which implies a Buy rating. Several strategies including fleet restructuring, introduction of international services, increased ancillary product offerings, capacity management and slot wins are expected to boost the company’s revenues and reduce expenses, going forward.
Other Stocks
Some other stocks that warrant a look in the aviation are United Continental Holdings, Inc. (UAL) and Republic Airways Holdings Inc. (RJET). Both the stocks sport a Zacks Rank #1 (Strong Buy).
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